Should You Roll Over Your 401k When You Leave Your Job?

If you're leaving your job and debating on rolling over your 401k, check out these pros and cons

By Barbara Friedberg, InvestorPlace Contributor

You’ve just left your current job and are wondering what to do with your 401k retirement account. Over the years, the account has grown to a tidy sum, and now, as your life evolves, you’re not certain what to do. Should you roll over your 401k when you leave your job?

When you leave an employer, you have three alternatives for your 401k or 403b accounts: cash out the 401k, keep it at the former employer or roll it over into an IRA.

Don’t Cash Out Your 401k

It’s tempting, but don’t cash out your 401k. That money is designated for your retirement and liquidating the account today, shortchanges your financial tomorrow. You will regret this decision.

If you liquidate your 401k you’ll owe taxes on the entire amount. If you’re younger than age 55, you’ll also pay a 10% penalty. Subtract 25% taxes and 10% penalty and you’ll lose $70,000, or 35% of your money. That means, your $200,000 401k account might equate to $130,000 or so, upon withdrawal.

Keep Your 401k at Your Former Employer

Under certain circumstances, you might consider leaving your money in your previous employers 401k plan. If your plan offers excellent fund choices with lower fees than their retail competitors, it might be best to keep your money where it is. If the account lacks management fees, that’s another advantage to leaving the money where it is.

Keeping your money at your former employer boils down to fees and available investment options. A rollover provides access to greater fund choices, but if you’re happy with the fees and the investment options at your former employer, you might want to keep the money where it is.

Roll Over Your 401k

A 401k roller means transferring the funds in your current 401k to another investment company. You might transfer the money to a discount broker such as Schwab, TD Ameritrade or Fidelity. Or, you might consider transferring the money to one of the newer robo-advisors, such as Betterment or free M1 Finance.

Here’s why you might consider the transfer:

Your old 401k only offers high fee funds.

Your old 401k charges high administrative fees.

Many 401k plans offer high fee actively managed investment funds, as opposed to low fee, market-matching index funds. Companies are required by law to disclose their fee structure, so examine your fund statements to uncover the fees. If your employer’s 401k is expensive then you’re a good candidate for an IRA rollover.

Reasons to Roll Over

Rolling over the money from your 401k to an IRA is still the best move in many cases.

There are many reasons to roll over your 401k plan when you move on to another job:

If you own several 401k plans at prior employers, you might want to consolidate them in an IRA. Keeping your financial accounts combined makes investment management easier.

If you’re seeking a more diversified portfolio it could be wise to roll over your 401k. Most 401k plans lack sufficient fixed income funds and others don’t offer low-fee, diversified index funds. If you’re seeking a diversified government bond fund or a small cap value stock fund, it’s likely you won’t find it in your 401k line up.

If you want complete control over plan withdrawals you’re best moving your 401k to an IRA. Although approximately two-thirds of large 401k plans allow scheduled withdrawals, others require an all or nothing option, according to the Plan Sponsor Council of America. If you want to choose which investments to liquidate and precisely when to withdraw, a rollover might be best.

Takeaway: Pros and Cons of a 401k Rollover

So should you roll over your 401k when you leave your job, or just leave it where it is?

In most cases, a 401k rollover into an IRA is preferable. Additionally, many brokerage companies offer cash bonuses when you roll over your account. If you’re having difficulty choosing between a traditional IRA or a Roth IRA rollover, the investment company representatives can help sort out your options.

Whether you choose to keep your 401k where it is or roll it over, get additional guidance from the 401k plan administrator or the investment brokerage firm representatives.

Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.